Australian debt position very comfortable

In discussing the role of debt in the world economy, economist Martin Wolf describes Australia's net debt position as comfortable and discusses whether the big gains in workplace productivity may have all been made in the past.

Transcript

EMMA ALBERICI, PRESENTER: Our other guest this evening is Martin Wolf, widely regarded as one of the world's most influential economists.

In the aftermath of the European banking crisis, the British government appointed Mr Wolf to its Independent Commission on Banking to identify what went wrong.

Early in his career he worked at the World Bank and is now chief economics commentator at the Financial Times in London.

EMMA ALBERICI: Now, you'll be giving a lecture this week that broadly speaking looks at how the world has changed since the global crisis. Has enough been done, in your view, around the world to avoid another crisis?

MARTIN WOLF: Yes, I am giving an interview, a lecture in honour of my former teacher, Max Corden, and the answer to the question is I think the world has made some progress.

I think the financial sector is probably more robust. There's certainly more capital in it. I think regulation has improved. I think the global imbalances that played a large part in the build-up to the crisis, they have diminished.

But I wouldn't begin to say that we have dealt with all the problems that caused the crisis and we certainly haven't yet dealt with all the problems that were consequent upon the crisis. We're not in any way out of it yet, so we've got quite a long way to go.

EMMA ALBERICI: Have attitudes to debt changed, do you think, since the crisis?

MARTIN WOLF: Yes, I think that's absolutely clear that the banks are certainly more cautious, they are all looking to get more capital and the investors are insisting on that. Households really don't want to borrow. In a country like the UK - I look at this very closely in my own country.

Credit has actually been shrinking pretty well quarter by quarter for four years. That's quite extraordinary. We've seen massive deleveraging in America. Of course in the short to medium run that's a huge problem because it's why demand is so weak.

So the trouble is after a big crisis like this that the lessons people rightly draw, which is they shouldn't have done this at all in the first place, makes it much more difficult to cope with the crisis and its aftermath.

EMMA ALBERICI: But the appetite for debt has shifted to governments.

MARTIN WOLF: Absolutely. And properly and necessarily. Everybody can't pay down debt at the same time. It doesn't add up. The economic system does have to add up. So if you've got the private sector deleveraging, that is to say, trying to spend less than its income, since national accounts have to add up, that means either foreigners or the government have to take the other side of this picture, which means either you run a fiscal deficit or you have a huge external surplus.

Now the whole world, most of the developed countries, can't all have an external surplus. It just won't add up either, so you end up with huge government deficits and I regard them as a necessary and inevitable consequence of the debt crisis.

Unfortunate, but it's the least bad outcome. The alternative is a depression with a debt collapse and I think that will be a disaster.

EMMA ALBERICI: Australia of course has its own significant public debt, significant relative to its own history. At the same time our terms of trade are down more than 10 per cent in the past year. How big a risk do you see that for our economy?

MARTIN WOLF: Well I have to say maybe this is a sort of egocentric sort of European view: your public debt problems seem amazingly trivial by our standards. We only wish we had your net debt position, which is obviously incredibly comfortable.

But Australia obviously is very, very open to the world economy, it's a trading nation, it sells commodities so its terms of trade have always been a bit volatile. It's always been or has been for a long time dependent on net imports of capital.

So it has to be very, very cautiously run and it obviously is always vulnerable to shocks. My assumption is that Australia can cope with those shocks. That would be my assumption. I always get most worried in these situations by what happens to the banking system and the question obviously is: how robust is the banking system to a big series of international shocks?

We found in Europe and North America that it wasn't and that's the big thing I'd focus on, but I imagine that the Australians have looked at that issue pretty carefully.

EMMA ALBERICI: Now in a recent piece you wrote for the Financial Times you posed the question: "Is unlimited growth a thing of the past?" Is it?

MARTIN WOLF: Well it is a question, it's not a statement. I was basing this on the work of an American economist called Robert Gordon who basically was arguing that the peak of productivity growth was in the middle of the 20th Century.

It was linked to the implementation of a very wide range of a very important, fundamental innovations and that since then we've basically seen innovation in more limited sectors of the economy, particularly information technology, which though very important doesn't affect the whole system to quite the degree that electrical - that the development of electricity, the internal combustion engine, jet travel, radio and all this did.

So the question is: can we sustain fundamentally new innovations, new general purpose technologies, develop those in a way that keeps the economy growing as we become used to, which is productivity growth of 1 or 2 per cent a year forever?

And he was putting forward the proposition that this could just slow and that endless growth isn't going to be endless; the period will be limited to a few hundred years and then we'll have to get used to being rich and static instead of being poor and static as we were beforehand.

I find that rather plausible and that will be a very interestingly different world from anything that we or our recent ancestors have been used to.

EMMA ALBERICI: Successive Australian governments have of course wrestled with this idea of how to lift stalling productivity growth. To what extent do you think industrial relations reform or tax changes can lift worker output?

MARTIN WOLF: I think it's a very big question. Most developed countries are worried about this now and most of them are finding it very, very sluggish. There are essentially two elements in productivity growth.

One is how far productivity is advancing in the most dynamic and richest country in the world, which is basically the US, and there we are seeing a slowdown again after the brief resurgence from the middle of the '90s, the middle of the last decade. So that sort of gives a limit.

And the second part is how far we can get up to the American level of productivity. And Australia isn't far off American levels. So while the things you describe - tax cuts, labour market reform - might raise it a bit towards US levels, because the US is much larger, there's more competition, particularly in services, but more economies of scale again in services. I don't think Australia's ever likely to ever catch up on the US.

So I tend to think the potential for raising productivity growth through these sort of relatively technical economic reforms are rather limited for a very developed country like Australia. And the really big question is: where's technology going to take us? What fundamental changes in productive opportunities are there going to be?

And that's where there is I think a bit of a question mark about what's going to happen in the next decade or two.

EMMA ALBERICI: Martin Wolf, we'll have to leave it there. Thanks so much for being there for us tonight.

MARTIN WOLF: It's a great pleasure.

Do you have a comment or a story idea? Get in touch with the Lateline team by clicking here.